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This article first appeared in the September 13, 2013 edition of Tax Notes Today.

Select e-mails between embattled IRS official Lois Lerner and other IRS employees during 2011 and 2012 provided to Tax Analysts on September 12 reveal some of the issues IRS employees were considering when they decided to more closely scrutinize conservative groups' exemption applications.

In one of three e-mail chains the House Ways and Means Committee shared with Tax Analysts and other media outlets, Lerner, former exempt organizations director in the IRS Tax-Exempt and Government Entities Division, responded to an e-mail containing a monthly report with a note calling the Tea Party matter very dangerous.

"This could be the vehicle to go to court on the issue of whether Citizen's United overturning the ban on corporate spending applies to tax exempt rules," she wrote in the partially redacted e-mail dated February 1, 2011. "Counsel and Judy Kindell need to be in on this one please. . . . Cincy should probably NOT have these cases." Kindell served as a senior technical adviser to Lerner.

Citizens United v. FEC, 558 U.S. 310 (2010), struck down restrictions on corporate spending in federal election campaigns, but section 501(c)(3) and 501(c)(4) organizations remain subject to the rules on political activity outlined in the IRC.

In response to Lerner's e-mail, Holly Paz, former director of rulings and agreements in TE/GE, noted that now retired IRS tax law specialist Carter Hull, who worked in Washington, was reviewing the Tea Party cases at each step and that no decisions would be made in the EO determinations unit in Cincinnati until the Washington office goes "all the way through the process with the c3 and c4 cases." Paz's response was also partially redacted.

Paz told congressional investigators that IRS employees often used the term "Tea Party" as shorthand for political advocacy cases.

Lerner replied to Paz's e-mail,"Thanks -- even if we go with a 4 on the Tea Party cases, they may want to argue they should be 3s, so it would be great if we can get there without saying the only reason they don't get a 3 is political activity."

The remainder of Lerner's latter e-mail was redacted. According to a Ways and Means spokesperson, committee staff redacted the material in the e-mail exchange because the information, which is unrelated to the political advocacy issue, is protected under section 6103.

Lerner's comments indicate that she believed the IRS's decisions on whether to grant exemption status to groups that engage in political activity would be closely monitored following the Citizens United decision, and possibly used by individuals or groups petitioning courts to find that the corporate spending restrictions the case struck down should also be eliminated for tax-exempt groups.

Lloyd H. Mayer of the University of Notre Dame Law School said he's not surprised by what Lerner said in the e-mails. "I think the IRS for many years has been very sensitive to the fact that the limits on political activity might be vulnerable to constitutional challenges," he said.

In the e-mail in which Lerner discusses the possibility that some groups that applied for exemption as 501(c)(3) organizations may be denied but could be approved under section 501(c)(4), she advises that the agency avoid citing political activity as the only reason for denying 501(c)(3) status. Mayer suggested Lerner was concerned that if the IRS denied a group 501(c)(3) status based solely on its political activity, that would lay the groundwork for litigation challenging the validity of the IRS regulations for 501(c)(3)s, which prohibit those organizations from engaging in any political activity.

Donald B. Tobin of Ohio State University's Moritz College of Law said the IRS knew that whatever determination it made regarding the political advocacy-related cases, that decision would be tested. "They were afraid that if they were aggressive, they would be accused of being political and they would lose these cases in court," he said.

Elizabeth J. Kingsley of Harmon, Curran, Spielberg & Eisenberg LLP said Lerner's comments seem to validate what outside observers have believed for years -- that the IRS would do anything to avoid issuing a ruling on the accessible level of political activity for 501(c)(3) and 501(c)(4) organizations, and to prevent a court case from challenging their current interpretation. "This is a really clear indication of just how concerned they were," she said.

Kingsley added that Lerner's fear of denying 501(c)(3) applications based solely on the group's political activity also gives some indication of why the IRS sat on the cases for so long.

Both Lerner and Paz are currently on paid administrative leave.

'Perhaps the FEC Will Save the Day'

Another e-mail chain from July 2012 shows Lerner's response to an employee who sent her and Paz a copy of an article reporting that the Democratic Senatorial Campaign Committee planned to file a complaint with the Federal Election Commission accusing three organizations of submitting exemption applications to the IRS claiming they were social welfare groups -- instead of filing as political committees -- in order to avoid having to disclose their donors. The article cites a decision by a federal appeals court in Richmond, Va., that said the FEC has the authority to require a social welfare organization to abide by the rules for a political committee if the organization is advertising like a political committee.

"Perhaps the FEC will save the day," Lerner responded.

Mayer said he doesn't see that comment as indicating any sort of political bias from Lerner but as more of her seeking to have the FEC "take off some of the pressure that the IRS was getting to do something about the (c)(4) problem."

Kingsley agreed, saying Lerner's comment was not carefully written, but appears to just be another sign that the IRS does not want to issue a ruling on the political activity of EOs.

'We Will Get Dinged'

In an e-mail chain from June 2012, Lerner and other IRS officials discuss an engagement letter the Treasury Inspector General for Tax Administration sent to the agency regarding consistency in identifying and reviewing exemption applications that involve political advocacy issues.

Richard Daly, a technical executive assistant to the TE/GE commissioner, informsthe other IRS employees in the e-mail chain that TIGTA will be reviewing how the agency deals with 501(c)(4) applications, specifically looking for consistency in processing the applications and at whether the IRS had a reasonable basis for asking the applicants for some types of information. "The engagement letter bears a close reading," Daly wrote in the e-mail. "To my mind, it has a more skeptical tone than usual."

Responding to Daly's e-mail, Lerner said, "It is what it is. Although the original story isn't as pretty as we'd like, once we learned this were off track, we have done what we can to change the process, better educate our staff and move the cases. So, we will get dinged, but we took steps before the 'dinging' to make things better and we have written procedures."

Lerner appears to be referring in part to changes made to the "be on the lookout" (BOLO) list that the IRS created to help identify emerging issues that IRS screeners should look for when receiving exemption applications. When the BOLO list was first sent out in 2010, it referred to "various local organizations in the Tea Party movement," according to TIGTA's May report. When Lerner learned of that language in June 2011, she had the BOLO revised to refer to "organizations involved with political, lobbying, or advocacy," according to TIGTA.

The Ways and Means spokesperson said Lerner's statement in the June 2012 e-mail exchange is untrue because the committee knows that the IRS continued the targeting for two years and because IRS employees have said in interviews with the committee that they still have no direction on how to process political advocacy cases. According toWays and Means, 56 conservative groups' applications remained unprocessed as of May 31.

Cleta Mitchell of Foley & Lardner LLP said the e-mails reveal that the statement Lerner made at the American Bar Association Section of Taxation meeting, admitting that the IRS mistreated conservative groups,and those that other IRS officials made in the following days were insincere.

"For those of us who have lived through the IRS's BOLO program targeting Tea Party organizations, which began in late 2009, early 2010, these internal e-mails are sickening confirmation that the IRS generally and its officials -- from former Commissioner Doug Shulman, to Acting Commissioner Steven Miller, to Acting Commissioner Danny Werfel and, most especially, Lois Lerner and Holly Paz, among others -- are all liars," Mitchell said in an e-mail to Tax Analysts. "They have lied to Congress, to the public, to attorneys seeking information as to the status of the cases, to TIGTA, and forced their underlings to also lie. I see names on these e-mails of IRS agents and employees who lied to me when I contacted them about the status of my clients' applications."

Mitchell said Congress should dismantle the entire EOunit. "Abolish it and the process of seeking exempt status from the IRS," she said. "Just send it to the ash heap of history. This level of dishonesty is not something from which any organization can recover because the corruption is simply too deeply rooted."

Ways and Means Chair Dave Camp, R-Mich., said the e-mails add to the "increasing and overwhelming evidence that Lois Lerner and high-level IRS employees in Washington were abusing their power to prevent conservative groups from organizing and carrying out their missions." He added, "There are still mountains of documents to go through, but it is already clear the IRS is out of control and they will be held accountable."

In a statement provided to Tax Analysts, Ways and Means ranking minority member Sander M. Levin, D-Mich., said Lerner was "incompetent in her management of the IRS tax-exempt division and unprofessional in her conduct," but he noted that Republicans' selective leaking of documents "does not change the fact that tens of thousands of documents and dozens of interviews with IRS employees have revealed absolutely no evidence of political motivation, no evidence of outside influence, and no evidence of White House involvement."

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